2014 2015 2016 2017 2018 2019 2020

GDP (% YoY) 0.50 -3.55 -3.30 1.06 1.12 0.92 (*) 2.08 (*)

Consumer Inflation IPCA (% YoY) 6.41 10.67 6.29 2.95 3.75 3.31 (*) 3.60 (*)

Current Account (USD bi) -101.4 -54.5 -24.2 -15.0 -21.9 -34.7 (*) -37.8 (*)

Foreign Investment in the Country (USD bi) 87.7 64.7 74.3 68.9 76.8 80.0 (*) 80.0 (*)

International Reserves (USD bi) 364 356 365 374 375 369 (07 Nov) -

Unemployment rate (%) 6.5 8.9 12.0 11.8 11.6 11.8 (Sep) -

General Government Gross Debt (% GDP) 56.3 65.5 69.9 74.1 77.2 79.4 (**) 80.3 (**)

Ibovespa Index (BRL, % chg.) -2.9 -13.3 38.9 26.9 15.0 22.2 (ytd) -

CDS 5 years (year average) 189 475 293 165 208 154 (Nov 19) -

Interest rate (Selic Target) (%, eop) 11.75 14.25 13.75 7.50 6.50 4.50 (*) 4.50 (*)Estimates: (*) Focus Survey, Central Bank of Brazil, Nov. 8, 2019); (**) Prisma Fiscal, Oct.2019

1289

783

1.64623244

Sources: BCB, Min. of the Economy, Bloomberg

November 11, 2019

THE LAST PAGE

More Brazil: The transformation of the Brazilian State

Week Highlights

• The auction of pre-salt areas in Bacia de Santos, related to the excess of production of the onerous assignment agreement, generated R$ 69,9 billion in revenues for federal, states and municipal governments.

• The COPOM Minutes reinforced the message that, starting from the additional cut signaled for December, a more cautious approach will be adopted. The text also pointed out that, with the current reduction in state participation in the economy, the changes in the credit market and financial intermediation, with a greater role of free resources and capital markets, may impact the transmission of monetary policy.

BRAZIL: MACROECONOMIC MONITOR AND REFORM AGENDA

MARKET WATCH

1.00.0

2.0

4.0

6.0

8.0

10.0

No

v-1

4

Mar

-15

Jul-

15

No

v-1

5

Mar

-16

Jul-

16

No

v-1

6

Mar

-17

Jul-

17

No

v-1

7

Mar

-18

Jul-

18

No

v-1

8

Mar

-19

Jul-

19

No

v-1

9

Real Interest Rate (YoY %)

Swap Pre x Di 360 days discounted of the IPCA Expectation for the next 12 months

80,000

85,000

90,000

95,000

100,000

105,000

110,000 Ibovespa Brasil Sao Paulo Stock Exchange(month avg.)

4.0

5.0

6.0

7.0

8.0

0 2 4 6 8 10 12Years

Yield Curve (CDI, YoY %)

November 11, 2019 1 Week 3 Months

IG period average: 171

50

100

150

200

250

300

350

400

450

500

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

Brazil 5-year CDS(month average)

2,000,000

2,200,000

2,400,000

2,600,000

2,800,000

3,000,000

3,200,000

3,400,000

3,600,000

Jan

-15

Ap

r-1

5

Jul-

15

Oct

-15

Jan

-16

Ap

r-1

6

Jul-

16

Oct

-16

Jan

-17

Ap

r-1

7

Jul-

17

Oct

-17

Jan

-18

Ap

r-1

8

Jul-

18

Oct

-18

Jan

-19

Ap

r-1

9

Jul-

19

Oct

-19

Vehicle Sales in 12 months - Anfavea

1247

783

1.59259259

Sources: BCB, Bloomberg

548530

-12

-1,327-1,535

421

1,1391,3732,027

2019(Sep.)

20182017201620152014201320122011

Net Job Creation/Destruction(12-mo, thousand people)

5.90

4.31

5.91 6.50

5.84 5.91 6.41

10.67

6.29

2.95 3.75 3.31 3.60 3.75

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Consumer Inflation (%)

IPCA (YoY) Inflation Target Tolerance Interval

-2.2

-3.5

-4.4

-4.5 -4

.1 -3.3

-2.0 -1

.0 -0.1

1.1 1.3 1.4

1.4

1.1

0.9 1.0 1.1

0.9

1.8 2.1

1.6

III -

20

15

IV -

20

15

I - 2

01

6

II -

20

16

III -

20

16

IV -

20

16

I - 2

01

7

II -

20

17

III -

20

17

IV -

20

17

I - 2

01

8

II -

20

18

III -

20

18

IV -

20

18

I - 2

01

9

II -

20

19

III -

20

19

IV -

20

19

I - 2

02

0

II -

20

20

III -

20

20

Gross Domestic Product(% change in 4Q)

ECONOMY WATCH

230

186

130

160

190

220

250

2013 2014 2015 2016 2017 2018 2019

Trade Balance (US$ bi, 12-mo.)

Exports

Imports

-2.0 -1.2 -0.7 -1.3 -3.0

-4.1 -3.2 -3.4 -2.9

2.7 3.3 2.3 3.3 3.4 2.7 2.4 3.7 3.3

-6.0

-1.0

4.0

Sep.201920182017201620152014201320122011

External Financing Needs (% of GDP, 12-mo.)

Current Account Direct Investment (net)

Market Expectations

60

80

100

Mar

-15

Jun

-15

Sep

-15

Dec

-15

Mar

-16

Jun

-16

Sep

-16

Dec

-16

Mar

-17

Jun

-17

Sep

-17

Dec

-17

Mar

-18

Jun

-18

Sep

-18

Dec

-18

Mar

-19

Jun

-19

Sep

-19

Confidence Indicators (FGV, s.a.)

Manufacturing

Consumers

20.619.9

20.3

21.921.622.222.022.4

Aug.20192018201720162015201420132012

Household Debt Service ratio (%, YoY)

6.47.17.89.010.2

6.0

3.02.32.52.4 1.31.61.72.51.90.6

-1.7-2.2-2.9-2.6

Sep.2019201820172016201520142013201220112010

Public Sector Fiscal Deficit (% of GDP)

Nominal Primary

300

400

500

600

2,700

2,900

3,100

3,300

3,500

3,700

3,900 New Credit Operations (12-mo accum., R$ bi)

Market-based Earmarked

A more robust recovery is still dependent on further advances in the reform agenda

The country runs a successful inflation target regime

The external accounts are one of the main pillars of the Brazilian economic stability

The credit market went through an adjustment process and now favors market-based operations

Brazil is working to improve its fiscal sustainability

Fiscal consolidation and productivity increase are crucial inputs for Brazil to grow strongly and sustainably. The new government is going forward to put in place a set of

reforms for speeding up growth and increasing potential output.

Main Measures

• Bill 1,646/19 creates measures to facilitate the collection of debt with the Social Security.• PEC 133/19 extends the reform for States and Municipalities. Senate´s second round of voting is scheduled for Nov. Savings of R$ 0.4 trillion.

• Brazil had been spending more than half of the Federal budget on social security and benefits. Gen. Govt. Gross Debt projections pointed to an unsustainable path. • The reform approved in October increases the time to retire, limits benefits, raises the rates of contribution for those who earn above the INSS ceiling and establishes rules of transition. • The reform will stabilize social security expenditures in 8.5% of GDP from 2022 on. Its impact is projected as around BRL 0.8 trillion in 10 years.• Law 13,846/19 reviews benefits and proceedings with suspected irregularities, and changes rules for granting benefits, such as reclusion allowance, death pension and rural retirement. The goal is to save about R$ 9.8 billion in the first year.

Social SecurityNext Steps

•Legislation being prepared

• Brazil needs to simplify the tax system and to reduce the tax burden on companies, the legal insecurity and the excessive legal dispute • Instrument: PEC and infra constitutional measures.

Tax ReformNext Steps

• Expand the Agreement for Economic Supplementation with Mexico• Trade agreement with the US• Trade agreement talks with South Korea, Japan, Canada• Instruments: Government decrees and resolutions

• The EU-Mercosur Free Trade Agreement was announced by both parties on June 28. The Free Trade agreement is to be ratified by all Parliaments involved.• Aims at increasing the openness degree (exports plus imports over GDP) from 22% to 30% of GDP in four years.• 2019 initiatives include: the end of quantitative restrictions on the free trade agreement of autos with Mexico; Free trade agreement with the European Free Trade Area (EFTA); modernization of tax agreements; agreement with Sweden to end the double taxation of income tax; import tax reduced to zero on over 1,000 industrial machines and equipment not produced domestically; reduction of the import tax for inputs and products of the chemical sector.

Trade LiberalizationNext Steps

• Economic Freedom Law: reduces red tape and Government intervention, facilitating the opening of new businesses. • Eliminates the need for low-risk activities to obtain any type of license; limits restrictions on working hours for commerce, services and industries; prevents laws to define prices; establishes a binding and isonomic treatment for similar situations; overrules outdated legislation; eliminates license requirements for testing, developing or implementing a product/service that does not pose high risks; impedes judicial changes in business contracts; establishes that unanswered license requests are automatically granted; extends higher court decisions to all cases; creates the “regulatory abuse” situation; among others issues.

Economic Freedom

• Broader digital integration, services provision, and database unification; Changes in the legal framework; among others.

• The Brazilian government transformed 400 public services and made them 100% digital.• Four key goals to be achieved by the end of 2020: i) launch a new digital identity, based on biometrics, for over 100 million Brazilians; ii) ensure that 70% of the over 3,000 services are digital; iii) consolidate government digital channels; iv) simplify business registration.• Current initiatives include The Digital Citizenship Platform (access and provision of digital public services); GovData (main official databases); and ConectaGov (connection of govt. systems).

Digital GovernmentNext Steps

• Submitted to Congress on Feb.• 3 Infra constitutional instruments (PL-881/2019, PL-882/2019 and PLP-38/2019)

• Changes to the Code of Criminal Procedure, Criminal Code, Criminal Law, Electoral Code, and others;• Measures will help reduce costs of doing business. Include the provisional execution of a criminal conviction after second instance sentences; the criminalization of irregular funding in elections; tighter sentences and penalties increase.

Fight corruption, criminal organizations and violent crimes Next Steps

• Provide consultation for foreign investors about legislation or administrative procedures related to investments in Brazil.

Ombudsman for Direct Investments

Main Measures

•4th Marginal Fields Round

•14th,15th, 16th Exploratory Blocks Bidding Round

•2nd to 6th Pre-Salt Production Sharing Bidding Rounds

52 PPI Projects Auctioned or Renewed

Oil and gas

•Privatization of 7 Distributors

(CELG, CEAL, CEPISA, CERON, Eletroacre, Amazonas, Boa Vista)

•Concessions of 2 Hydroelectric Plants

(Jaguara, UHE) and 2 Small Plants

•Transmission Lots and Stations

Electric Power

•16 ConcessionsAirports

•20 Projects (leasing, extension or assignment agreement)

Port Terminals

•Concession of Rodovia da Integração do Sul

Highways

•Privatization of CASEMGSupply

117 ongoing PPI Projects

•5 Extensions and 1 Concession (Norte-

Sul)Railways

•Transmission Lots•2 Auctions of New Energy• 4 Hydroeletric Plants (environm. license)

Electric Power

Airports

•6th Round (North I, Southand Central)

•15 Leasings •2 Privatizations• 2 New Investments• 1 Privatization Study

Port Terminals

•Privatization: Casa da Moeda, CEASAMINAS, Infraero shareholdings, Eletrobras, CEAGESP, ABGF, EMGEA, Correios, Dataprev, Serpro, CEiTEC, Telebrás, BB shares•PPP for COMAER

• 4 Mining Rights • 1 sale of assets

Mining

•Angra 3 Plant

NuclearPower

• 14 Marginal Fields Areas• Auction of Assignment Agreement

Oil and gas

• Carteira Verde e Amarela to ease access to the labor market.• Emprega Mais: new workforce training strategy.

•The registers of the unemployed were opened to private recruitment companies, extending the use of the national employment system dataset.

Employment Next Steps

• Congress appreciation• Instrument: Supplementary Bill.

•Bill establishing formal independence to the Central Bank of Brazil. It comprises a four- to eight-year term for the directorate of the institution, with no overlapping with the presidential mandate; and the end of ministerial status given to the president of the Bank.

Central Bank Independence (Senate PLP 19/19)Next Steps

• Congressional approval• Reduction and streamlining of subsidies granted by the Government, which amount to around 4.7% of GDP in the 2019 budget.

Subsidies reductionNext Steps

• Congress appreciation

• The Fiscal Balance Plan will aid States and Municipalities in financial distress to achieve fiscal adjustment, allowing the access to loans guaranteed by the Federal Government. Entities must provide the counterpart of recovering their payment capacity .

Fiscal sustainability of subnational entities (PLP 149/2019)Next Steps

• 21,000 commissioned positions eliminated; limitations for creating collegiates and elimination of unnecessary collegiates; restrictions for hiring civil servants and rules for hiring senior officials. • Congressional approval

Public administration overhaul (Decree 9.725/19)Next Steps

• As of Aug. 1st, there are 130 companies owned by the Fed. Govt. • On June 06, 2019, the Supreme Court ruled that subsidiaries (which comprise more than half of the companies) do not need Congress approval to be sold.• The announced target for 2019, already met, was US$ 20.0 billion.

Privatization

•CBTU

•Trensurb

UrbanMobility

•10Concessions

Railways

•São Francisco River Integration Project

Water Infrastructure

INVESTMENTS, CONCESSIONS AND PRIVATIZATIONS

•11 Concessions• 1 environmentallicense

Highways

•Concessions of Iguaçu, Lençóis Maranhenses and Jericoacoara

National Parks

•PPPs for prisons and for police comm.• Studies for street lighting against violent crimes and for socioeducational measuresPublic

Safety

•Studies for universalization andurban solid waste energy recovery Sanitation

Public Companies

•Study: child education

Education

•Concession of LotexLottery

PPI Project Portfolio

Signature bonuses of US$ 0.6 bi

Investments of US$ 2.1 bi

38 airportsAirports

Signature bonuses of US$ 0.7 bi

Extension of 15,107 km

Investments of US$ 14.8 biRailroads

Signature bonuses of US$ 0.2 bi

Investments of US$ 1.1 bi

21 terminals and 2 portsPorts

Extension of 16,574.82 km

Investments of US$ 34.9 biHIghways

Completed

In progress

Highways StudiesPublic

Hearing

TCU

Assessment

BR-364/365/MG/GO

BR-101/SC

BR-381/262/MG/ES

BR-163/230/MT/PA

BR-153/080/414/GO/TO

BR-040/495/MG/RJ (Concer)

BR-116/465/101/SP/RJ (Dutra)

BR-116/493/RJ/MG (CRT)

Integrated Highways of Paraná

BR-153/282/470/SC e SC-412

BR-158/MT

BR-364/RO/MT

4Q19

3Q20

3Q20

2Q20

4Q20

4Q20

2Q20

2Q20

3Q20 4Q20

Bidding

DocumentsAuction

4Q20

1Q20

3Q20

3Q20

3Q20

2Q21 3Q21

1Q21

Ports StudiesPublic

HearingTCU Assessment

Port of Suape/PE (SUA05) 4Q19

Port of Itaqui (IQI 03, 11, 12, 13)

Port of Santos/SP (STS 14, 14A)

Port of Paranaguá/PR (PAR12)

Rental of Solid Bulks in Port of Aratu/BA (ATU 12)

CODESA Privatization

São Sebastião Privatization

Studies for the Destatization of Port of Santos

Port of Suape/PE (SUA01)

Port of Paranaguá/PR (PAR07, 08, XX)

Terminal - Port of Santana (MCP1)

Cabling Stimulation Policy

2Q20

1Q20 2Q20

1Q20

Bidding Documents Auction

1Q21 2Q21

4Q20 2Q21

3Q20

3Q20

1Q20

2Q20

2Q20

3Q21 4Q21

Railroads StudiesPublic

HearingTCU Assessment

Bidding

DocumentsAuction

EF-334 – FIOL 1Q20 2Q20

EF-170 – Ferrogrão 2Q20 3Q20

EF-354 – Integração Centro-Oeste

North Branch - Ferroanel - São Paulo

Railroads StudiesPublic

HearingTCU Assessment Legal Opinion Subscription

Contract Extension Malha Paulista 3Q19

Contract Extension Carajás (EFC) 4Q19

Contract Extension Vitória-Minas (EFVM) 4Q19

Contract Extension MRS 2Q20

Contract Extension FCA 2Q20

Airports StudiesPublic

HearingTCU Assessment

6th round - South Block (9)

6th round - Northern Block 1 (7)

6th round - Central Block (6)

Disposals of Infraero shares (4)

4Q20

4Q20

4Q20

3Q20

3Q20

3Q20

Bidding Documents Auction

1266

778

1.62724936

The More Brazil Plan of State Transformation comprises three Proposals of Constitutional Amendments (PEC)

Institutional Framework of the New Fiscal Order• Representatives of the federal government, the Presidents of the Republic, the House, the Senate, Supreme Court, Court of Audit, governors and mayors will evaluate the financial sustainability of the Federation and ensure solid fundamentals.• Normative guidance to standardize the interpretation of budget-financial concepts. • Public programs and works get budget prediction so that resource flows are not interrupted. Ensure that future generations do not to inherit current debts.• Laws and court decisions that generate expenses will only be effective when budgeted.• Tax benefits will be reevaluated every 4 years. At the federal level, as of 2026, they will not exceed 2% of GDP. If above this ceiling, there can be no new grant, extension or renewal of tax benefits.

Unbinding, Deindexing and Disengaging• The Federal Government will not provide to subnational governments to pay judicial bonds• The share of the Workers Support Fund (FAT) allocated to BNDES will be 14%.• States and municipalities will receive and define the use of all salary-education funds. • Joint management of education and health earmarket resources.• Compulsory expenditures will be relaxed in cases of emergency fiscal dissarray. Readjustments in social security benefits and BPC by the inflation index are guaranteed.• Public revenue will not be tied to agencies, funds, or expenses, except for fees, donations, municipal and state participation funds and constitutional bindings.

Federation Strengthening• Municipalities with less than 5,000 inhabitants and own revenues below 10% of the total revenue will be incorporated by the neighboring municipality. There will be new restrictions on the creation of municipalities.

Autonomy with Responsibility• Royalties and special interests will be transfered to all states and municipalities.• The Federal Government will only provide guarantees to operations of states and municipalities with international organizations, starting in 2026.• Credit operations between entities of the Federation, directly or through funds, local authorities, foundations or state-owned companies are prohibited.• The Federal Government will be forbidden to provide financial aid to subnational entities, starting in 2026.

New Public Accounts Rules • Allows public expenditure contingency for states and municipalities.• Integration of fiscal rules (Fiscal responsibility Law, Golden Rule and Expenditure Ceilings) in all levels of government to ensure the sustainability of public debt.

Legal Security• The transfer of royalties and special participation of oil will end the disputes between the Federal Government and the states.• The use of pension funds and judicial deposits between individuals to cover for expenses of the entities is prohibited.

State of Fiscal EmergencyWhen the Golden Rule (Federal Government) is not met or current expenses are over 95% of current revenues (States), automatic adjustment triggers will come into effect, with restrictions to civil servants' payrolls, promotions, carreer restructuring and working time; prohibition to create new compulsory expenses and tax benefits, and suspension of FAT transfers to BNDES.

The PEC of the Federative Pact will transfer R$ 400 bi to States and Municipalities in 15 years

Federative Pact Emergency EmergencyFederative PactFed. Govt., when the Golden Rule is not met When credit ops. exceed capital expenses in 1 year

One-year period, renewable Two-year period

States and Municipalities, when current expenses exceed 95% of current revenues in 1 year

Cannot promote civil servantes, create new positions, change careers, make hirings and compensatory payments

Cannot create compulsory expenses and tax benefits

Allows the reduction of 25% of the servants´ working time and payment

Saved values destination determined in the budget 25% for infrastructure projects

Suspends tranfers from FAT to BNDES

Joint management of health and education resources

Convergence to Golden Rule can be included in the budget

Includes pensions expenses in the limit of expenses with personnel

Complementary Law to define indicators, sustainable debt levels and debt convergence path

Tax benefits reviewed every 4 years from 2026 on, up to a limit of 2% of GDP

Destination of tax collection and financial surplus to public debt amortization

Permanent MeasuresAutomatic Adjustment Triggers

PREVIOUS ISSUES

THE LAST PAGE

INTERNATIONAL ECONOMIC AFFAIRS SECRETARIAT sain@economia.gov.br +55 61 2020-4292

ERIVALDO ALFREDO GOMES SecretaryCARLOS EDUARDO LAMPERT DA COSTA Undersecretary for International MarketsJÔNATHAS DELDUQUE JR. Head of International Financial MarketsJOSÉ NELSON BESSA MAIAPRISCILLA BELLE OLIVEIRA PINTODEBORAH RODRIGUES Advisor

More Brazil: The transformation of the Brazilian State

The PEC of the Public Funds will allow a decrease of R$ 220 billion in the public debt

Current Situation

• There are 281 public funds in Brazil

• There are nearly R$220 billion parked in funds while the country is in fiscal deficit

Current Issues

• Congress has no power to decide how to use funds resources

• Funds do not allow resource allocation in different areas

• Funds hinder debt management and create budgetary ridgidities

• Funds waste money on all levels of government

Measures

• Money already parked in funds will be used in the only legal way, for the payment of public debt

• New resources will be applied primarily to Poverty Eradication and national reconstruction

programs

• Most funds will be terminated at the end of the second year following the approval of the PEC

• The creation of new public funds will be made by complementary law

The Emergency PEC will free up to R$ 50 billion in 10 years